Low-income housing tax credit (LIHTC) prices will continue to rise in the first half of the year despite already floating near the stratosphere, according to a majority of syndicators.

About 55% of the firms surveyed by Affordable Housing Finance predict prices will increase, while 45% say the market will hold steady. No one anticipates a drop in the first six months of the year.

“LIHTC pricing to developers has increased consistently over the last 12 to 18 months, and we expect this trend to continue well into 2015,” says Tony Bertoldi, executive vice president of syndication and investor relations at City Real Estate Advisors. “If the economy continues to grow and interest rates remain low as expected, investor appetite for LIHTCs should continue to be strong in the first half of 2015, even with investor yields trending downward.”

The 22 syndicators surveyed paid an average of 94 cents per dollar of credit in the fourth quarter of 2014, compared with 90 cents a year earlier. Meanwhile, yields to investors averaged 6.5%, a decline from 7% at the end of 2013.

“Given the results of current bids at the beginning of this year, we think pricing to developers will increase slightly,” says Joe Hagan, president and CEO of National Equity Fund. “We are already seeing direct investors being highly aggressive for deals with seasoned developers located in Community Reinvestment Act [CRA] markets, which will set the trend going forward for the first half of the year.”

There also looks to be strong activity early on as syndicators work to secure deals earlier to avoid “clustering activity” later, adds Tony Alfieri, managing director of RBC Capital Markets—Tax Credit Equity Group. “If yields continue to decline throughout 2015, securing deals earlier in the year may help syndicators maintain margins,” he says.

On the other side, the syndicators who think the market will remain steady say there’s little room left for investor returns to decline.

“Yields are at historic lows,” says Jeffrey Goldstein, executive vice president and COO at Boston Capital. “Investors are pushing back at levels lower than today. There is also an anticipation of alternative rates potentially rising in the second half of 2015.”

A few direct investors in the hot CRA markets have pushed yields down to a level that is likely unsustainable, adds Raoul Moore, senior vice president of syndication at Enterprise Community Investment.

Rising competition

The LIHTC market can be summed up in one word—competitive. And, the battle will continue this year.

“Our biggest concern over the next six months is acquiring enough product to satisfy investor demand,” says Todd Jones, senior vice president at Boston Financial Investment Management. “Given that a large number of states won’t be allocating until late Q1 and Q2, there will be a lack of 9% deals in the market, and competition will be that much more aggressive in an already ultra-competitive environment.”

Others are also concerned about the market’s big appetite for credits and the limited supply.

“Over the shorter term, we are most concerned with continued strong demand resulting in a shortage of well-­underwritten product and yields decreasing to the point where the economic investors may be driven to the sidelines,” says Benjamin Mottolo, president of Stratford Capital Group.

For syndicators, it’s not just competition with each other. They’re also feeling increasing pressure from direct investors. These direct buyers impact syndicators by absorbing part of the market share, and they can skew prices in markets where they are aggressively bidding on deals.

In addition, the competition is extending into markets across the country. “We are seeing very strong interest for non-CRA deals from the economic investors,” says Christine Cormier, senior vice president, investor relations, at WNC. “In fact, the economic investors are looking to stay clear of the CRA markets due to the price premium in such markets.”
Although the largest metropolitan areas account for a significant share of CRA capital, there has been increased competition from regional banks in secondary and tertiary markets, making it challenging for economic investors to achieve their target yields, adds Thomas A. Panasci, director of finance and investments at First Sterling Financial.

The heated market is good for developers, as it leads to multiple offers for their housing tax credit deals, but the concern is always that deal terms will be whittled away during the negotiations.

“Developers are pushing back on terms, but it’s important to maintain strong underwriting to continue to attract a broad range of investors,” says Stacie Nekus, senior vice president at Alliant Capital.

“I think sticking to the AHIC [Affordable Housing Investors Council] guidelines for underwriting as closely as possible is important. The price is going to be driven by the market, but a big part of investor interest is due to the stability of the asset class.”

A RAD world

The LIHTC market has seen its first deals involving the Rental Assistance Demonstration (RAD) program and will soon see many more. The federal preservation program, which allows public housing and certain other properties to convert to long-term Sec. 8 rental assistance contracts, is tripling in size to allow up to 185,000 public housing units to participate.

Eight syndicators reported closing or having RAD deals in their pipeline as of late January. Red Stone Equity Partners had closed eight RAD projects in four states and has another six deals in the works.

Overall, the firm saw and financed more preservation projects in the market than in years past. “There was also a growing emphasis, and preference, on the part of many state housing finance agencies to encourage the development of permanent supportive housing projects,” says Ryan Sfreddo, managing director, investor relations, at Red Stone.

Ohio Capital Corporation for Housing (OCCH) reported closing the first RAD deals in Ohio and Kentucky.

So far, most of the RAD projects have been 4% and tax-exempt bond deals, so there hasn’t been a big impact on the market, according to Stephen M. Daley, executive vice president of The Richman Group Affordable Housing Corp.

“With the new round, maybe this will put some stress on the 9% allocations, but most RAD deals will still be tax-exempt deals,” he says.

2014 Tax Credit Activity
Company Capital Closed (in $millions) LIHTC Projects Acquired  
Alliant Capital $405 42
Boston Capital 505 54
Boston Financial Investment Management 439 59
City Real Estate Advisors 430 61
Community Affordable Housing Equity Corp. 109 42
Enterprise Community Investment 620 66
First Sterling Financial 250 21
Great Lakes Capital Fund 219 26
Housing Vermont 19.5 5
Massachusetts Housing Investment Corp. 71 10
Midwest Housing Equity Group 175 24
National Equity Fund 663 76
Ohio Capital Corporation for Housing 260.7 41
PNC Real Estate 583.9 80
R4 Capital 386 32
RBC Capital Markets—Tax Credit Equity Group 683 67
Raymond James Tax Credit Funds 719.5 91
Red Stone Equity Partners 510 33
The Richman Group Affordable Housing Corp. 603 61
Stratford Capital Group 190 24
Virginia Community Development Corp. 38.5 13
WNC 220 40
Source: AHF Survey, January 2015